Legal Updates

Have the Rules on Limitation and Exclusion of Liability now changed?

In many of the contracts that we put together for clients, one party (or both) may try to limit their liability for losses suffered as a result of breach of that contract. Where those contracts are individually negotiated and assess the risk open to each party, the Court will rarely intervene. However, under the Unfair Contract Terms Act 1977 (UCTA), if one party contracts on the other’s standard terms, the law imposes certain requirements of reasonableness in the framing of any provisions which attempt to limit or exclude the liability of the party on whose standard terms the contract is based.

The High Court at first instance recently looked at these issues in the case of Saint Gobain Building Distribution Limited (trading as International Decorative Surfaces) v Hillmead Joinery (Swindon) Limited. The parties had contracted on IDS’ standard terms and IDS had attempted to limit its liability in a number of ways. The Court looked in detail at each of the elements of the limitation and exclusion and applied the test of reasonableness to each. The Court then decided that a number of the limitations and restrictions on liability were not reasonable. In summary:

IDS, in its standard terms, gave Hillmead a short period of time to look at the appearance of the products that were supplied, and in which to notify of any visual defects. If it failed to do so, IDS took no responsibility or liability for visual defects. If visual defects were identified using the process in the standard terms, then IDS agreed to replace the products but would not otherwise be liable for any losses arising from visual defects.

The IDS standard terms also excluded all other warranties and implied terms (including the statutory implied term that the goods would be of satisfactory quality). The Court held that this exclusion, even when coupled with the limited warranty given it its place, was not reasonable because the exclusion covered all liability if the buyer did not comply with the terms. The fact that the defects in question were ones that IDS could have itself seen on delivery did not help IDS’ position.

It is therefore important when attempting to limit your liability for the supply of goods that you provide a reasonable warranty as to the quality or fitness for purpose of the goods if you exclude the statutory provisions. A way of doing this might be, for example, to ensure that there was a detailed specification and to warrant that the goods would comply with the specification for a specified (and reasonable) period of time.

The standard terms also excluded all liability for consequential loss. The Court took the view that this exclusion was also unreasonable. It considered a number of facts to be relevant in making its decision including that

the parties were not of equal bargaining power, and

the parties knew that the buyer would suffer direct loss in excess of the cost of replacing the goods, and

the clause was an exclusion, not a limitation, and

this exclusion was more draconian that the provision referred to above – which the Court also found was unreasonable.

Excluding consequential loss is common in B2B contracts. Parties will need to take particular care in deciding whether such a provision, if in standard terms and not individually negotiated, is likely to be enforceable. An alternative would be not to exclude all consequential loss but instead to include a general overarching limit on all liability. This should involve an assessment of the value of the losses. If assessment is unrealistic or not possible, it would not be unreasonable to set that limit at 125% to 150% of the total charges under the contract.

It is therefore important if you are contracting on your standard terms or those of another party, to carefully consider the exclusions and restrictions on liability and any exclusion of any statutorily implied terms. If the contract is on your standard terms, it may be better to offer a less restrictive clause at the outset than to have an entire clause determined to be invalid and unenforceable (at which point there would be no limits of liability in place).

Clarkslegal, specialist Commercial lawyers in London, Reading and throughout the Thames Valley.

For further information about this or any other Commercial matter please contact Clarkslegal's commercial team by email at contact@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.